Wednesday, 12 June 2019

Trump’s Long-Term Goal Is Not Global Free Trade

In this guest post Don Boudreaux offers several more reasons to dismiss the absurd assertion that Trump’s long-term goal is a world of freer trade. Trump, he reminds us, has pontificated for decades on trade, with words that reveal him as nothing more than a clichéd economic nationalist.

Trump’s Long-Term Goal Is Not Global Free Trade

The economic case against protectionism is practically invincible. While theoretical curiosities can be described in which an import tariff (or an export subsidy) yields to the people of the home country net economic gains, the conditions that must prevail for these possibilities to have practical merit are absurdly unrealistic.

Yet in their efforts to justify punitive taxes on fellow citizens' purchases of imports, protectionists regularly trot out these theoretical curiosities. And none is more frequently paraded in public than is the assertion that high tariffs imposed by the home government today will pressure foreign governments to lower their tariffs tomorrow, with the final result being freer trade worldwide.

Protectionists declare with straight faces such guff as: “Our tariffs are the best means for making trade freer and bringing about what Adam Smith and all free traders have desired: maximum possible expansion of the international division of labour!”

This protectionist apology for tariffs is as believable as is the apology often offered by today’s campus radicals for speech codes and the harassment of certain speakers: “Our insistence on silencing conservatives and libertarians is actually a means of promoting campus diversity and inclusion!”

Both declarations are Orwellian.

Trump Decades Ago

In the case of Donald Trump, the claim that he is at heart really a free trader who raises tariffs today with the aim of bringing about lower tariffs tomorrow — and all because he is committed to achieving free traders’ ideal goal of maximum possible expansion of the international division of labour — is especially preposterous.

Trump has pontificated on trade for decades, and every word out of his mouth clearly reveals a man who knows nothing about the economics of trade -- who is as clichéd an economic nationalist as can be imagined.

Behold this line from a 1990 interview he did in Playboy: “The Japanese double-screw the US, a real trick: First they take all our money with their consumer goods, then they put it back in buying all of Manhattan. So either way, we lose.”

Let’s examine this unalloyed gem of economic witlessness.

Overlooking Trump’s outrageous exaggerations, such as his claim that the Japanese buy up “all” of Manhattan, we start by stating an obvious truth: the voluntary purchase of a good is not a transaction in which the buyer is ''screwed” or has his or her money “taken.” Instead, the buyer’s money is voluntarily spent. While every person of good sense sees a foreign seller who makes attractive offers to domestic buyers as someone who improves the well-being of each buyer who accepts the offer, Trump sees this seller as a con artist or thief.

And so Trump ignores the value to Americans of the imports they purchase. In typical mercantilist fashion, he believes that the ultimate purpose of trade is to send out as many exports as possible in exchange for as much money as possible — money that in Trump’s ideal world is never spent on imports. His view on this matter is even more bizarre than that of ordinary mercantilists. For Trump, imports are not merely costs that we endure in order to export, they are actual losses. (Although it goes without saying, I’ll say it nevertheless: Trump does not understand that imports are benefits and that exports are costs.)

Furthermore, by describing the money spent on imports as “our money,” Trump reveals his belief that money earned by each American does not belong to that individual but, instead, to the collective. To America Inc.

In the fashion of the typical mercantilist, the presumption is that the nation is akin to a gigantic household whose members all share in and collectively own its money. And just as Dad justly superintends little Emma’s and Bobby’s spending to ensure that they don’t dissipate the family’s wealth, Uncle Donald must superintend his subjects’ spending in order to ensure that we don’t dissipate the nation’s wealth.

One other flaw in the above quotation from Trump’s Playboy interview is notable: he believes that foreign investments in America inflict losses on all Americans. He doesn’t pause to consider that when Americans sell assets to foreigners they regain ownership of some of the dollars that Trump, in his previous sentence, lamented are lost to Americans when they bought imports.

The ignorance is frightening.

Nor does he ask what the American sellers of these assets do with their sales proceeds. Perhaps they too invest some or even all of them. And if so, perhaps these new American investments will prove to be more profitable than are the investments made in America by foreigners. (By the way, contrary to another mercantilist myth, Americans are not made better off when foreigners’ investments in America fail. Quite the contrary.)

An even deeper error infects Trump’s “understanding” of foreign investment: he implicitly — and, once again, like all mercantilists — assumes that the amount of capital in the world is fixed. Only then would it be true that each American sale of assets to foreigners necessarily reduces Americans’ net financial worth (which is presumably what Trump means when he says that “we lose” when the Japanese purchase Manhattan real estate).

Trump Today

Trump continues to this day to warble the same cockamamie protectionist tune. To mention only one of dozens of recent examples, in April of this year, referring to the so-called U.S. trade deficit with China, he asserted that “we have been losing to China for many years, $500 billion a year.” Even ignoring the utter meaninglessness of that in which Trump finds deep significance — namely, bilateral trade deficits — how our voluntary purchases of goods from the Chinese, and how Chinese investments in America, result in our “losing” to China remains inexplicable.

Making matters worse is the release last month of a Treasury Department report that must be read to be believed. It’s a gusher of protectionist goofiness, evincing throughout an astonishing level of confusion about trade, as well as hostility to each country whose producers dare to sell to Americans more goods than American producers sell to that country’s consumers. Hoover Institution economist John Cochrane was being polite in describing this document as “institutionalised nonsense.”

It’s impossible to encounter the president’s incessant complaints and ignorant pronouncements about trade — as well as his inclusion among his advisors of wackadoodle protectionists such as Peter Navarro — and conclude that Trump’s ultimate goal in using tariffs is to achieve the free trade necessary to bring about the greatest possible expansion of the international division of labor.

The many people who today excuse Trump’s protectionism by attempting to camouflage it as bargaining aimed at making global trade freer completely ignore what the man says (and has long said). The only other possibilities are that these apologists are either as economically ignorant as is Trump or they are dishonest stooges. Whatever the explanation, none of these apologies for Trump’s tariffs warrants a smidgen of respect.

* * * * *

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

5 comments:

At a basic level free trade makes sense. If one looks a little deeper, at possible higher order effects, the landscape becomes less clear.Donald Boudreaux view come across as dogmatic and Trump bashing.

Charlie Munger gave a speech back in 2003, in which he touched on higher order effects."This shows how all-human systems are gamed. Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo’s law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, non-obvious explanation that was so powerful that people were charmed with it, and they still are, because it’s a very useful idea. Everybody in economics understands that comparative advantage is a big deal, when one considers first order advantages in trade from the Ricardo effect. But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.

Now let’s follow with second and third order consequences: You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.

If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences.

The best answer I ever got on that subject – in three tries – was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardodiagnosed advantages of trade.” Which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him."

You should have stopped there. The underlying premise to everything else that follows is predominantly collectivist. Rather than see free trade as trade between individuals in different countries, you're see it as geo-political context between competing state powers. If your concern is for the individuals within each state rather than the state itself however, this generally shouldn't be a consideration.

The only possible exception to this is if there's a sound case to made on the basis of national security. EG: the US relying on Chinese companies to produce it's aircraft carriers, or some important component that could be crucial in any future war. If the argument is that China has the ability to produce better technology (which BTW I doubt), and thereby become a greater military threat - then no amount of free trade barriers is going to change that becoming a reality anyway.

No Mark , I shouldn't have stopped there.The "tragedy of the commons" is all about individual self interest having an impact on the collective.

Also, Charlie Mungers examples were to show the idea of higher order effects. I dont think Charlie mentions geoploitics.. As far as I know , he was talking about economic reality.That China was/is becoming an economic powerhouse , as well as a military giant while USA was/is in decline. He says this is a consequence, of the , socalled , free trade between China /USA.

Just as a husbands gambling habits can have an impact on his whole family, so can many individuals actions have an impact on the wealth of a Nation.

What Charlie says, makes sense to me.

You say... " if your concern is for the individuals within each state rather than the state itself....."The individual vs collective seems like a dichotomy. Its not an either /or thing. Its about finding some kind of balance. Timeframes , beyond any individuals life, become meaningful.An individual does not exist apart from society and a society is simply a group of individuals.

To have an economic view that is simply based on the idea of individual self interest, probably limits the ability to see wider ranging higher order effects, in my view..

An example of that is Ray Dalios' assertion that Capitalisms' inability to share the "economic pie" is most likely going to result in social unrest and maybe even violence.His view makes sense to me. https://www.linkedin.com/pulse/why-how-capitalism-needs-reformed-ray-dalio/

The tragedy of the commons is about plundering of a resource under collective ownership. It is an argument clearly against the collective. It reinforces how powerful the drive of self interest is v the community.The points raised as to the second or third order consequences are valid however the possibility that those consequences can be known is a presumption of the highest order.

The notion that all the nation states in the trading action will continue with same political philosophy and eventually domination will be the endgame is projecting a result(s) extrapolated from a solid basis. If anything in human endeavour that we can rely on to form a basis of known is that the future is unknowable. Individuals acting in their own best interests will carry the day even in the oppressive centrally planned states. To trade freely with each other remains the goal, the rest is politics which is Trumped by tribalism/nationalism which in turn Trumps economics . We in tiny town should be far more concerned with individual rights v the collective and be vigorous in proposing a smaller government and greater wealth creation.

Tragedy of the commons: What narcocapitalist said. In the context of free trade, the closest example I can think of this are ill-conceived attempts to protect a particular industry to the general detriment of the economy as a whole.

"China was/is becoming an economic powerhouse , as well as a military giant while USA was/is in decline" - To the extent that's a reality, no amount of free trade barriers could stop that decline happening - but they can haste it by encouraging US malinvestment on things they are less efficient at, and making goods more expensive in the US.

Individual versus collective: I have no idea what you mean by balancing individual with collective interests. A group is just a collection of individuals, and any members fundamental rights or interests don't magically change by being part of that group. My comment that you "should have stopped there" wasn't intended as sarcasm, but my observation that free trade oponents generally have no difficulty acknowledging the benefit of win-win trade on an individual level, or even within borders - but for some reason they think things somehow change when you're dealing with larger groups rather than individuals, and/or the trade is international rather than intranational.

Finally, if "sharing the economic pie" means surrendering what you produce for the benefit of someone that hasn't produced, and that's the only way to avoid violence - then I'd contend we're well and truly screwed anyway and headed to the abyss. But I don't think it's that bad, most people don't want be parasites. To the extend the modern economy has unfairly concentrated wealth in the hands of the few at the expense of the many (something socialists exaggerate - but has some basis in central banking, credit creation, bank bailouts, etc), it has nothing to do with free trade and everything to do with limits on it.

1. Comments are welcome and encouraged. 2. Comments are moderated. Gibberish, spam & off-topic grandstanding will be removed. Tu quoque will be moderated. Links to bogus news sites (and worse) will be deleted.3. Read the post before you comment. Challenge facts, but don't simply ignore them.4. Use a name. If it's important enough to say it, it's important enough to put a name to it.5. Above all: Act with honour. Say what you mean, and mean what you say.